Russia’s Complicated Relationship With OPEC

Russia, Saudi Arabia, and the United States are the world’s most important oil producers. While there has been a lot of discussion about Saudi Arabia’s move to crush U.S. shale by flooding international markets with oil, the relationship between Saudi Arabia and Russia is much less understood.

Saudi Arabia and Russia have a lot in common. Both depend on oil exports for an overwhelming portion of their budget revenues. Both put energy issues at the heart of their foreign policy and use oil (and in Russia’s case, natural gas) as tools to achieve political objectives.

But Russia is not a member of OPEC, and has suffered enormously as a result of Saudi Arabia’s decision to seek contractions in oil production from abroad. The head of Rosneft, Russia’s state-owned oil company, harangued OPEC (and by implication, the Saudi kingdom) at a London Conference on February 10. Rosneft’s Igor Sechin, who has been personally targeted by western sanctions, said that OPEC “has lost its teeth” as a result of its decision to keep oil production at elevated levels, a move that has led to market “destabilization.”

The verbal barrage suggests that Russia, more so than OPEC (or at least Saudi Arabia), is the one that is suffering under Saudi Arabia’s decision.

OPEC has sought Russian cooperation on oil output levels in the past, offers that Russia has thus far declined.

Most recently, Saudi Arabia has dangled the prospect of real oil production cutbacks in front of Russia in exchange for Russia dropping its support for Syrian President Bashar al-Assad. “If oil can serve to bring peace in Syria, I don’t see how Saudi Arabia would back away from trying to reach a deal,” a Saudi diplomat told The New York Times.

Russian Foreign Minister Sergey Lavrov dismissed the idea that the two sides could come to such an arrangement. “We see eye to eye with our Saudi colleagues in that we believe the oil market should be based on the balance of supply and demand, and that it should be free of any attempts to influence it for political or geopolitical purposes,” Lavrov said, according to the Times. The Russian government may have considered the Saudi offer more closely than Lavrov suggests, but Russian President Vladimir Putin is nothing if not resolute when it comes to resisting foreign pressure to influence Russian policymaking.

Despite the lack of success in backroom negotiations, and despite Sechin’s angry comments, there are signs that closer coordination between OPEC and Russia could be forthcoming. Sechin said that Russia has asked to become an observer to OPEC, a move that could lead to greater communication between the two sides, if not coordination.

Still, Sechin said that Russia has declined OPEC’s offers to join the 12-member oil cartel, owing to Rosneft’s status as a private company. “We’ve have asked for OPEC observer status, but OPEC instead said ‘join and come work with us’,” Sechin said. “But we can’t work as OPEC does. Our oil industry is privatized, we have non-Russian shareholders and I manage a public company.

Sechin glosses over the fact that 70 percent of the company is owned by the Russian government. And his use of ‘we’ shows that he is speaking on behalf of the government – Sechin, after all, is a close ally of Putin. A more likely explanation is that Russia would not be able to stop production at a moment’s notice if OPEC decided to cut its production quota. Many of Russia’s biggest oil fields are in cold parts of the country that require operations remain uninterrupted.

Ultimately, however, Russia needs to keep the taps running full tilt and hope that U.S. shale bears the brunt of adjustment. Russia’s decline of Saudi overtures indicate that Saudi Arabia will keep dumping oil onto the market.

By Nick Cunningham of Oilprice.com